BOJ should stop sticking to failed easy-money policy

July 30, 2016

The Bank of Japan (BOJ) on July 29 in its monetary policy board meeting decided on additional monetary relaxation measures under which the bank will increase its annual purchase of exchange traded funds (ETFs) from the current 3.3 trillion yen to 6 trillion yen with a majority vote of the board members.

ETFs are a type of financial product whose prices are linked with stock prices. As an increase in the BOJ’s purchase of ETFs will work to push up stock prices, two of the nine board members opposed the additional ETF purchase by saying that it may convey misleading messages.

The current easy-money policy, which the BOJ has been carrying out as part of the “Abenomics” economic policy, aims to break away from deflation and raise commodity prices by 2%, but so far has made no progress.

The BOJ in its statement on July 29 stated that the expanded ETF purchase will have a synergy effect if combined with the new economic stimulus package that the Abe government is expected to announce soon. Japan’s central bank also proclaimed that the proposed measure is inseparable from the planned stepping up of Abenomics.

The ongoing massive monetary relaxation, including the large purchase of government bonds, would impose lower savings rates and other financial burdens on the general public. The more bonds the government issues, the more purchases the BOJ makes. If such an abnormal situation continues for a long time, it will lead to an undisciplined state finance sector and the government will have difficulties in departing from the situation. The BOJ should get rid of the failed easy-money policy.